J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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truly are. J. C. Penney, however, has a relatively high level of disclosure withinits financial reports. Therefore, they use the flexibility allowed to them whilemaintaining a certain level of transparency for their investor information.Actual Accounting StrategyFinancial statements produced by companies are given a certain level ofdiscretion when creating their financials in accord with GAAP. They have theoption to make their documentation appear aggressive, conservative, or amixture of both. In using this leeway to their advantage, firms can manipulatetheir performance to give a good economic understanding or hide the actualperformance of the company. After reviewing J. C. Penney’s previous financialstatements, it appears they have chosen to show both aggressive andconservative documentation.Some form of retirement plans are available through all department retailstores. J. C. Penney has a defined benefit pension plan that is offered to allemployees after 1 full year of service or 1,000 hours of work. With these planscome many assumptions that require significant judgment. “The Companyutilizes third parties, including actuarial and investment advisory firms, to helpevaluate the appropriateness of the expected rate of return, the discount rateand other pension plan assumptions annually” (J. C. Penney 10-K 2006). Usingan outside source to help find estimations gives JCP a fair assessment of whatrates to state within their financials. As mentioned previously, J.C. Penney’spension discount rate has decrease substantially over the past five years from7.25 to 5.8 percent. Investopedia.com claims that a lower the discount rateused on pension cost/expenses will cause the overall cost of these expenses toincrease (www.investopedia.com). From this point of view, you could state thislowering of rates as a conservative action of these firms. As shown in theprevious graph, this has been an industry wide change over the past five years.This had little change on the recording of pension expenses for J. C. Penney; in49
2006, they made several changes to their recognition of defined benefit plans.The changes should have a stronger showing on the 2007 financials, but nosubstantial changes that would affect the company’s statements.Most department store retailers have a large amount of operating leaseson their books, and J. C. Penney is no different. They have a substantial amountof operating leases amounting to a present value of $944 million, while holdingonly $8 million of capital leases on record. Firms choose to record these leasesas operating because, “the lessee does not assume the risk of ownership, thelease expense is treated as an operating expense in the income statement andthe lease does not affect the balance sheet” (Capital Resources, www.crny.com).This is considered to be an aggressive accounting technique, but onethat most retailers disclose in their financials.J. C. Penney offers many allowances through different programs in orderto maintain good relations with their suppliers. These practices include discountson advertising, markdown reimbursements, and for defective merchandise, all ofwhich require specific conditions for their allowance or repayment. Such as foruse when recording markdowns, when reimbursements are encountered withmerchandise that has been sold, the loss is directly related to the cost of goodssold for the period encountered. In the case that allowances are encounteredwith the vendor before the merchandise is sold, the record is documented withassociation to the merchandise cost. This technique would be consideredsomewhat conservative, and as well an industry standard practice.Quality of DisclosureThe quality of communication between the company and those who studythe financial position or direction of the company in respect to annual reports iscrucial in determining the confidence of those outside the company looking in.The following sections discuss the worth of the J. C. Penney’s annual reports inboth a qualitative and quantitative perspective.50
Page 1 and 2: J. C. Penney Company, Inc. Equity V
Page 5 and 6: Industry AnalysisIn 1902, James Cas
Page 7 and 8: Financial Analysis, Forecast Financ
Page 9 and 10: Business & Industry AnalysisCompany
Page 11 and 12: Industry OverviewThe retail industr
Page 13 and 14: Five Forces ModelThe Five Forces Mo
Page 15 and 16: ConcentrationThe level of concentra
Page 17 and 18: capable of offering lower prices th
Page 19 and 20: If a firm wishes to shut down, it m
Page 21 and 22: Legal BarriersMany industries have
Page 24 and 25: These costs include issues such as
Page 26 and 27: Bargaining Power of SuppliersThe de
Page 28 and 29: The relative bargaining power of th
Page 30 and 31: Competitive StrategiesIn order to a
Page 32 and 33: Department stores have to focus on
Page 34 and 35: The Big PicturePlayers in this indu
Page 36 and 37: Lower Input CostsJ. C. Penney is at
Page 38 and 39: in the last five years. This trend
Page 40 and 41: convenient for different consumers
Page 42 and 43: transactions have been improperly s
Page 44 and 45: Penney does state in its annual rep
Page 46 and 47: Operating and Capital LeasesOperati
Page 48 and 49: Potential Accounting FlexibilityA f
Page 52 and 53: Qualitative Analysis of DisclosureT
Page 54 and 55: we can see why targeting the strong
Page 56 and 57: manipulation diagnostics for J. C.
Page 58 and 59: Net Sales/Net Accounts ReceivableNe
Page 60 and 61: Net Sales/Unearned Revenue1200Net S
Page 62 and 63: Below is a chart of sales manipulat
Page 64 and 65: As for the industry, all the compan
Page 66 and 67: Pension Expense/SG&APension Expense
Page 68 and 69: Below is a chart of all expense man
Page 70 and 71: discount rates in respect to pensio
Page 72 and 73: Financial Analysis, Forecast Financ
Page 74 and 75: paying off their short-term obligat
Page 76 and 77: ecause many firms in this segment o
Page 78 and 79: Penney’s inventory turnover is in
Page 80 and 81: ConclusionAnalysis through liquidit
Page 82 and 83: operating efficiency because the fi
Page 84 and 85: Return on AssetsReturn on Assets0.1
Page 86 and 87: Capital Structure AnalysisWhen look
Page 88 and 89: however, in 2006, J. C. Penney show
Page 90 and 91: Sustainable Growth RateSustainable
Page 92 and 93: average of only years 2005 and 2006
Page 94 and 95: (reported in millions)Annual Income
Page 96 and 97: We then began to look at the equity
Page 98 and 99: Common Size Balance Sheet 2002 2003
Page 100 and 101:
(numbers in millions)Statement of C
Page 102 and 103:
ConclusionOverall, it appears that
Page 104 and 105:
Inc. We set these averages equal to
Page 106 and 107:
Price to BookPPS BPS P/B IndustryAv
Page 108 and 109:
Price Earnings GrowthPPS EPS PEG In
Page 110 and 111:
y J. C. Penney’s EBITDA. Then we
Page 112 and 113:
Regression Analysis3 Month Rate 72
Page 114 and 115:
Intrinsic ValuationsIntrinsic valua
Page 116 and 117:
amount in the eye’s of shareholde
Page 118 and 119:
This particular stock price in our
Page 120 and 121:
esidual income or converge. Future
Page 122 and 123:
To find our long run return on equi
Page 124 and 125:
Sensitivity AnalysisGrowth Rates0 -
Page 126 and 127:
for this large difference between s
Page 128 and 129:
Analyst RecommendationAfter careful
Page 130 and 131:
AppendixLiquidity RatiosCurrent rat
Page 132 and 133:
Capital Structure RatioDebt to equi
Page 134 and 135:
SUMMARY OUTPUT3 Month Regression72
Page 136 and 137:
SUMMARY OUTPUT6 Month Regression72
Page 138 and 139:
SUMMARY OUTPUT2 Year Regression72 M
Page 140 and 141:
SUMMARY OUTPUT5 Year Regression72 M
Page 142 and 143:
SUMMARY OUTPUT10 Year Regression72
Page 144 and 145:
Cost of Equity 0.1361Estimated Pric
Page 146 and 147:
Discount Dividends Model0 1 2 3 4 5
Page 148 and 149:
Residual Income Model WACC(AT) 0.07
Page 150 and 151:
Z-Score AnalysisZ-Score=1.21.43.320
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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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